This month marks the five-year anniversary of the Supreme Court‘s Murphy decision, which overturned the Professional and Amateur Sports Protection Act (PASPA,) allowing states across the country to legalize US sports betting.
The industry has changed a lot in five years, as have many of those covering the industry. There has been a lot of good that has happened. There has also been a fair bit of bad, and even some ugly.
The Supreme Court issues orders and opinions at 10 a.m. ET and Monday, May 14, 2018, was a day that changed sports in the US. After roughly six years of fighting, the state of New Jersey, which had cycled through two governors during the course of the litigation, finally prevailed in its quest to offer legal sports betting.
Even as litigation was winding through the federal court system, times were clearly changing. NBA Commissioner Adam Silver had written an op-ed calling for federal oversight of sports betting in 2014, MLB Commissioner Rob Manfred made comments calling for the end of the prohibition, and virtually every league and team in the country had some sort of deal with a daily fantasy sports company.
Still, when the decision came down, it was a shocking moment. Federal statutes that have existed for 25 years do not get struck down every day, at least not in their entirety.
Expansion, expansion, expansion
Even before PASPA was struck down, it became clear that a number of states were going to jump at the opportunity. Pennsylvania and a few other states passed laws a year before the decision that in the event sports betting is allowed they could launch.
In perhaps an odd moment, New Jersey was not even the first state to launch single-game betting outside of Nevada in the wake of the decision, as other states had positioned themselves to be ready while New Jersey was still litigating. While New Jersey would launch before the end of summer in 2018, they were behind a small group of others who beat them to the punch, starting with Delaware.
The expansion of the industry has been one of the positives. If we look at the regulated market as an opportunity to capture money that was previously going to unregulated operators, it seems safe to conclude that the regulated market expanding as it has is generating at least some tax revenue off bets that were otherwise going untaxed.
Surprise to supporters?
The expansion of the industry, into now 37 states (a number that could very well be outdated by the end of this month), has likely surprised even the most bullish observers. If one were to have asked most people how many states sports betting would be in by May 2023, they would have said somewhere in the range of 20-25.
Of these states, each has adopted its own model of regulation. This might be all the more impressive: as virtually every state has reinvented the wheel, some of those wheels have been heavily influenced by certain lobbyists, but each state has done its own thing.
The regulated system works
While there have been several high-profile incidents of prohibited individuals making bets that they should not, we have seen just how the regulated market works. Unlike scandals of the past that might only be uncovered through tangential investigations outside of the legal market in Nevada, the regulated system is showing itself to be efficient at policing prohibited activities at the window.
We have seen the system work in both the in-person model with Josh Shaw and now the scheme allegedly involving Brian Bohanon, but we have also seen the system work online with Calvin Ridley and numerous members of the Detroit Lions and Washington Commanders.
While some may quibble about the fairness of the punishments associated with these violations, that is a beef to have with the sports organizations, not the sportsbooks who are simply guarding against rule violators. Are there definitely people falling through the cracks? That seems almost certain. But is the system doing a better job than what we had before? Almost certainly.
Direct and indirect money
While the economics of sports betting are easily manipulated and have occasionally been used to sell the industry as more of a boost than it likely is, it is hard to deny that sports betting has been bringing in new revenue to states that were not there before. While New York is at the top of the pile in terms of tax revenue – we will perhaps look back in another five years and question whether the tax rate was sustainable – other states like New Jersey have done very well with a low tax rate.
While some states have been disappointed with tax revenue, in many cases, they likely had unrealistic expectations for what sports betting might do for them.
The sports leagues themselves have been beneficiaries of expanded gambling. Research shows that gamblers watch more sports than non-gamblers, and this will and likely has translated into higher premiums placed on broadcast deals. Even the NCAA, who remains adamantly opposed to any form of gambling, is seeing college football broadcast deals reach upwards of $1 billion a year in the case of the Big Ten. While gamblers are not responsible for the entirety of the value there, they undoubtedly have contributed.
Not just the boys
Once thought of as an activity primarily consumed by males, sports betting companies are seeing a rise in women signing up, there has also been an expectation that increased legalization of sports betting could increase the popularity of several prominent women’s sports.
While there has not been a lot of research showing the impact of legalized betting on consumption, anecdotal evidence including the 2023 Women’s Final Four being the most watched in history could support the idea that sports betting is playing a role of some level in growing women’s sports.
A few good years
The last five years of the sports betting industry have been focused on growth. The next five years are likely to see the industry focus on maturing.
What the market looks like in 2028 is an unknown, but the rate at which we reached 37 states with legal betting was incredible. There are only 13 states left, and how many of those will come online in the next five years and who will be the dominant players in five years are the storylines developing right now.
Then there’s the bad in US sports betting
Depending on who you asked, the Supreme Court’s decision may have been a blessing or a curse. While we now have 37 states that have voted to legalize sports betting, there are a number of issues starting to rise to the surface about the type of market that has been built.
For all the good, there has been a fair amount of bad and ugly.
An uncompetitive market
The sports betting market is not competitive. If someone were to look at a pie chart of the sports betting marketplace you would realistically notice only two companies: FanDuel and DraftKings.
Both daily fantasy giants, who once considered a merger out of a rumored desperate financial situation, now sit firmly perched atop the US sports betting universe. Some (and I’ll take a minor victory lap here) suggested that these companies would have a huge advantage in the marketplace because of how for four-plus years prior to the legalization, they were building customer lists that would easily transition over to sports betting.
Others insisted that daily fantasy and sports betting consumers were different, and the daily fantasy companies would not be able to compete with the operators who had been doing this for years in Nevada, or in the UK. Those people were wrong.
Breaking down US sports betting share
Depending on the month and how you conceive of market share, DraftKings and FanDuel control somewhere between 60-85% of the US sports betting market. In the fourth quarter of 2022, FanDuel reported that it had 50 percent of market share.
There is a small handful of five to eight other companies that make up the majority of the remaining bit of pie, and then more than a dozen companies fighting for fractions of a percent. How long will small companies hang on? We do not know.
We have already seen a number of very well-resourced companies leave the US market, including a pending PointsBet sale.
Something has to change, right?
Something is going to break at some point. A national market that is controlled by two companies is not going to be good for the consumer.
This will almost certainly translate into less favorable pricing as companies’ investors demand that profits begin being placed above customer growth. The growth of FanDuel and DraftKings into sports betting behemoths has largely come at the expense of profitability, something that investors will not allow to happen forever.
Ultimately, whether there is enough action in an industry with profit margins around 5-6% for investors to get what they want without the expansion of iGaming, which has not garnered nearly the enthusiasm) remains to be seen.
Training bettors for better pricing
One of the big questions that is virtually impossible to measure reliably is whether the regulated industry has put a dent in the unregulated market. We see regulators from a half-dozen states now asking the federal government to go after unregulated operators and shut them down.
Good luck. Unregulated operators have been here longer, they have a lot of advantages, and something that people do not like to admit is their customers perceive them as being better. One of the initial rationales cited by many including Silver for legalizing sports betting was to combat the unregulated market and bring back money that was not being taxed.
The best we can do is suggest that maybe it is happening. While New Jersey’s model of regulation sought to offer conditions for operators whereby they could operate without facing burdensome regulatory costs that might allow the regulated market to compete with unregulated operators, other states have been seemingly indifferent at best, jacking up tax rates and extracting as much rent from operators as possible.
A market that operates at a loss is not sustainable. Eventually (to the extent they are not already) consumers are going to begin receiving higher pricing, which will render the regulated market less attractive in comparison to the unregulated market. Potentially this could result in sports bettors learning to bet in a regulated market, only to see them seek out better pricing in the unregulated market as their skill improves.
Where are the adults in the room?
While the first few years of regulated betting seemed to pass by without a ton of controversy, in year four and now entering year five, we are seeing many of the same issues that brought the daily fantasy sports industry to its knees, minus the questions about legality. The sports betting industry has done a poor job of getting ahead of any bad news.
One need only look at the issues with advertising and responsible gambling. Who would have thought that making a new gambling product available to virtually anyone over 21 (or 18 some places) and not increasing funding for problem gambling would result in a coming crisis? Well, apparently no one in the sports betting industry, which has continued to pump out ads and largely perfunctory gestures claiming to be interested in protecting vulnerable consumers.
The reality is that money talks; codes, guidelines, and whatever else does not move the needle. Rolling out responsible gambling advertising guidelines while allowing advertisements to be plastered all over a stadium and nonstop during broadcasts feels like a pretty hollow gesture. Where is the industry, where are the sports leagues, the local teams speaking up as Washington DC looks to defund problem gambling programs?
Charting a new course
There has been a lot of good from legal sports betting, but there has been a fair bit of bad and ugly. The industry, moving forward, needs to be more proactive in protecting its interests.
This includes ensuring that the industry does not consolidate around two options and that the industry stops playing ignorant to the issues connected to gambling and makes proactive steps to ensure that they do not result in a problem.
America’s love of gambling has gone through ebbs and flows over history. Pushing the envelope too far could see public opinion start to swing back in the other direction. Proceed with caution.
